Wouldn’t it be nice if your life were filled with guarantees? A guarantee that it was not going to rain on your golf or tennis day? A guarantee that the TSX and S&P 500 were going to be up for the year? A guarantee that your investments would never end up being worth less than what you invested? Well, there may not be any way to control the former but there is a way to guarantee the latter, if you choose to incorporate segregated funds into your investment portfolio.

Segregated funds are similar to mutual funds in that they are professionally managed investment funds covering the full array of investment themes. The key difference, however, is that they are offered by life insurance companies where there is an obligation to return either all of your invested capital or, at the very least, a high percentage of it back to you either at maturity (usually 10 years from the date of deposit) or at death. It is like investing with a parachute on your back. You are assured of a safe landing no matter what turbulence or uncertainty you encounter on the way.

As we see ourselves in an investment landscape where equities have delivered increasingly disappointing returns and fixed-income interest rates are barely staying above zero, many investors have been reluctant to take the plunge into new investments or even touch their existing ones. Segregated funds are a way to entice new investors into the markets while also assisting veteran investors to secure their investments for now and for the next generation.

Segregated funds also appeal to small-business owners and unincorporated professionals as the ability to name a beneficiary within the segregated fund policy contract may render the assets to be protected against potential creditors. However, it is essential, in this instance, to speak to a qualified legal adviser about any asset protection options that may be available to you.

This beneficiary designation is also a way to direct assets to chosen heirs, discreetly, without having the assets go through one’s estate for distribution at death. In provinces where probate fees are a concern, the beneficiary designation allows those investors to sidestep probate, which can represent a significant savings to the estate.

The essential components of segregated fund investing are as follows:

In most segregated fund contracts, upon death, the greater of the full market value of the segregated fund or 100 per cent of the original invested capital (less withdrawals) is paid out to your beneficiaries.

Some segregated fund contracts reduce the 100 per cent guarantee for deposits made when the depositor is over age 80, while others reduce the death guarantee to 75 or 80 per cent of the original capital in order to reduce the overall contract fees. Compare policies.

In addition, at maturity (which is 10 years from the date of deposit) a minimum of 75 per cent of the original invested capital (less withdrawals) or the full market value, whichever is higher, is refunded to the policy holder. Some contracts allow for the full 100 per cent to be guaranteed at maturity, but these are less common these days.

Many segregated funds have a reset feature, which allows the maturity and death-benefit guarantees to be re-set at higher levels should the market value of the portfolio rise. This allows you to guarantee both the original values and growth. Neat!

The investment options for segregated funds are numerous, much like mutual fund investing.

If you are interested in emerging markets, there are emerging market funds to choose from. You like the U.S. equity market? Many well-known U.S. equity funds are available under the segregated fund envelope. Corporate bonds? No problemo.

Plus, there is flexibility to switch between funds should one investment theme be losing its sheen and it is suggested that you move into another sector.

However, not everyone offers segregated funds for purchase. Since these are investments offered through life insurance companies, only those advisers that have life licences can sell you segregated funds.

If your adviser says he or she does not recommend them, ask if the person is licensed to sell them or not. Their inability to offer them may have a bearing on their recommendation.

Indications are that Canadians are enthusiastically embracing the concept with over $88 billion currently invested in segregated funds, with that number expected to double by 2018.

The segregated funds’ maturity and death guarantees come with a cost, however, above and beyond that of the underlying mutual fund, averaging about 80 basis points higher than the same mutual funds’ management-expense ratios (MERs). These higher fees scare off some investors while others recognize that the investment’s appealing features have associated costs.

Segregated funds are offered by the major life insurance companies across Canada, including Canada Life, Manulife, RBC Insurance, Standard Life and Sun Life to name a few. Often the underlying funds are managed by such well-known mutual fund managers as Dynamic, Fidelity and Russell, as well as their own in-house investment management teams.

The investment landscape has been offering a bumpy ride as of late, but segregated funds offer an added level of comfort and security to take the plunge. Ready to jump? Here’s your parachute.

John Archer is a financial security adviser with RBC Wealth Management Financial Services Inc. in Montreal. We welcome new client inquiries at johnarcher.ca or at 514-878-5040.

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